|
Forms
of Business
Forms of Business
The most common forms of business are the sole proprietorship, partnership, and corporation. When beginning a
business, you must decide which form of business to use. Legal and tax considerations enter into this decision.
Only tax considerations are discussed in this article.
Tip
Your form of business determines which income tax return form you have to file.
Sole proprietorships. A sole proprietorship is an unincorporated business that is owned by one individual. It is
the simplest form of business organization to start and maintain. The business has no existence apart from you, the
owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned,
whether or not used in the business. You include the income and expenses of the business on your personal tax
return.
More information. For more information on sole proprietorships, see IRS Publication 334, Tax Guide for Small
Business. If you are a farmer, see IRS Publication 225, Farmer's Tax Guide.
Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade
or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and
losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from
its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners.
Each partner includes his or her share of the partnership's items on his or her tax return.
More information. For more information on partnerships, see IRS Publication 541, Partnerships.
Corporations. In forming a corporation, prospective shareholders exchange money, property, or both, for the
corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure
its taxable income. A corporation can also take special deductions.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when
distributed as dividends. However, shareholders cannot deduct any loss of the corporation.
More information. For more information on corporations, see IRS Publication 542, Corporations.
S corporations. An eligible domestic corporation can avoid double taxation (once to the corporation and again to
the shareholders) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal
income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's
shareholders include their share of the corporation's separately stated items of income, deduction, loss, and
credit, and their share of nonseparately stated income or loss.
More information. For more information on S corporations, see the instructions for Form 2553, Election by a Small
Business Corporation, and Form 1120S, U.S. Income Tax Return for an S Corporation.
Limited liability company. A limited liability company (LLC) is an entity formed under state law by filing articles
of organization as an LLC. None of the members of an LLC are personally liable for its debts. An LLC may be
classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an
entity separate from its owner by applying the rules in regulations section 301.7701-3. For more information, see
the instructions for Form 8832, Entity Classification Election.
January 2, 2012
Back to Top
Go to Next Article: Obtaining Your
Employer Identification Number
###
Source: http://www.irs.gov/publications/p583/ar02.html#d0e196
| 
